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March 6, 2013

Inflation Tempers Dow Celebration: Motley Fool

Adjusted numbers means we’re still 8% below 2007 peak

Everyone forget about inflation?

The news that the Dow broke its 2007 record high had folks celebrating, but before they pop the bottle of Dom, they might consider inflation’s role in reaching the milestone.

Which is to say that because of inflation, we didn’t actually reach it.

The Motley Fool provides a rather large asterisk to Tuesday's announcement, noting that by closing bell we were still under by 8%. Sure, real numbers were a record, but the adjusted numbers were not, and since adjusted numbers provide the measure of purchasing power, those are the ones to watch.

Folks at the Fool take aim at financial journalists for their accuracy (or lack thereof) in their reporting.

“Financial journalists typically report growth and returns on a nominal basis (i.e., before inflation is accounted for), except where someone does the work for them, such as when the Bureau of Economic Analysis releases GDP growth figures, which are reported on a real, inflation-adjusted basis,” columnist Alex Dumortier writes. “This is a grave disservice to investors and consumers! Inflation has a very real, and definite, cost.”

Adjusted for inflation, the Dow actually closed at 13,042.51.

“For the Dow to achieve a new inflation-adjusted high today would have required a closing price of roughly 15,480,” he notes. “Inflation is a reality in the world we live in; you need to invest as such. Make sure you're looking at the right numbers.”

Which isn’t to say we won’t eventually get there. The Dow surged even higher to 14,297 in Wednesday afternoon trading.